Capital Budgeting

Example: Expansion Project Analysis:

Suppose ABC Company wants to replace an existing printer with a new high speed copier. The existing printer was purchased 10years ago at a cost of $ 20,000. The printer is being depreciated using straight line basis assuming a useful life of 16 years and no salvage value.

The new high-speedcopier can be purchased for $ 36,000 (included freight and installation). It will reduce labor and raw material usage sufficiently to cut annual operating expense from $ 19,000 to $ 7,000.

It is estimated the new copier can be sold for $ 5,000 at the end of 6 years. The old printer current market value is $ 6,000. If new printer is acquired the old printer will be sold to another company on its market value.

The company's marginal tax rate is 35% and the replacement. Net working capital requirements will also increase by $ 4,000 at the time of replacement. The project cost of capital is 12% and new printer will be depreciated by WDV method 25%.

Required: Compute Initial Investment outlay,operating cash flow overthe project'slifeandtheterminal year cash flows for ABC Companys replacement project. Then determine whether project should be accepted using NPV analysis.